AMP Services Ltd v Manning (No 2) [2007] FCA 82 (9 February 2007)

DAMAGES – breach of fiduciary duties – loss of clients – compensation for lost income – how assessed – loss of chance of retaining clients – capital value – how assessed

Target Holdings Limited v Redferns (a firm) [1996] 1 AC 421

In the matter of AMP Services Ltd and Arrive Wealth Management Ltd

AMP SERVICES LTD AND ARRIVE WEALTH MANAGEMENT LTD v ANGELA MANNING AND POLLIANNA HARKNESS

NSD 983 of 2004

FINKELSTEIN J
9 FEBRUARY 2007
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 983 of 2004

BETWEEN:	AMP SERVICES LTD and ARRIVE WEALTH MANAGEMENT LTD Plaintiffs
AND:	ANGELA MANNING and POLLIANNA HARKNESS Defendants

JUDGE:	FINKELSTEIN J
DATE OF ORDER:	9 FEBRUARY 2007
WHERE MADE:	MELBOURNE

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 983 of 2004

BETWEEN:	AMP SERVICES LTD and ARRIVE WEALTH MANAGEMENT LTD Plaintiffs
AND:	ANGELA MANNING and POLLIANNA HARKNESS Defendants

JUDGE:	FINKELSTEIN J
DATE:	9 FEBRUARY 2007
PLACE:	MELBOURNE

1 This is the second part of a "split" trial. In the first part Ms Manning was found to have breached the equitable duty of good faith she owed to her former principal, Arrive Wealth Management Ltd, for having induced Arrive’s clients to transfer their business to her new employer, Goldman Sachs JBWere Services Pty Ltd. The purpose of this part of the trial is to determine what compensation Ms Manning ought to pay for the breach of that duty.

2 The principles according to which equitable compensation is to be assessed have been identified. They are set out in my reasons delivered at the conclusion of the first part of the trial. The parties had been invited at that time to make submissions and for their assistance were referred to several relevant authorities. The parties turned down the invitation. Nonetheless, during the hearing on damages Mr Braham, counsel for Arrive, made detailed submissions on the subject, which in some aspects depart from my description of the principles.

3 A convenient place to begin a consideration of the quantum of Arrive’s claim is to explain how it arrived at the amount it claims. First it calculated the decline in its annual revenue since Ms Manning’s departure. It said the drop was $1,636,130. It attributed this decline solely to Ms Manning’s breach of duty by asserting that there was no other cause. (In fact, as will be seen, there were several other causes.) Then it placed a capital value on the lost revenue. The capital value was derived from prices paid by purchasers of similar businesses. An analysis of those prices showed that the prices represented a multiple of between 2.75 and 3.65 for recurring commission and a multiple of between 0.85 and 0.95 for fees for services revenue. By applying the multiples at the upper end of these scales Arrive calculated its capital loss to be around $4.3 million.

4 In my earlier reasons for judgment I said that Arrive is entitled to compensation that would "restore [it] to the position in which [it] would have been if there had been no breach [by Ms Manning] of [her] obligations". That makes it necessary to determine whether Arrive would have suffered any capital loss if there had been no breach of duty on the part of Ms Manning. Or, put another way, a fiduciary is liable to make good any loss suffered by her principal which, but for the breach of duty, the principal would not have suffered. In Target Holdings Limited v Redferns (a firm) [1996] 1 AC 421, a case dealing with a defaulting trustee, Lord Browne-Wilkinson put it this way (at 434): "[T]here does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable".

5 There are three possible heads of compensation to which Arrive might be entitled: (i) the capital loss arising from the loss of clients to GSJBW; (ii) the income lost in the period between the time when the clients left Arrive as a result of Ms Manning’s breach of duty and the time they would have left had there been no breach; and (iii) the value of the lost opportunity to retain the clients. Care must be taken when considering each of these heads to avoiding double counting. I will consider each head in turn.

6 Based on the evidence that had been tendered at the trial on liability I said that if Ms Manning had waited out the notice period before asking clients to follow her to GSJBW most would have done so, as they had when she moved from PriceWaterhouseCoopers to Arrive in mid-2002. That was a tentative finding, but if it stands it would be impossible to accept Arrive’s claim to recover the capital value of its lost clients. It would be impossible because the clients would have been lost even if there were no breach. I will return to this issue after considering the other two possible heads of compensation.

7 The second head of compensation is for the loss of income in the relevant period. In my reasons I suggested that the income to which Arrive was entitled was that which it would have received from the lost clients (that is those induced to go to GSJBW) in the period between 20 January 2004 (the day on which Ms Manning gave notice) and 16 February 2004 (the day on which her employment terminated). Mr Braham sought to persuade me that this period is too short because it usually took three to four weeks for a client to transfer his business from Arrive to GSJBW. However, it seems to me that this is nothing more than a delay. Precisely the same chain of events had to take place but should have taken place approximately one month later. Accordingly, the relevant period for the calculation of damages is the period between 20 January 2004 and 16 February 2004. For some type of revenue the true period is probably more like 13 February 2004 to 11 March 2004 but, in any event, it is a period of four weeks.

8 A more precise calculation of lost income might have been produced by working out the exact date upon which each client to which Ms Manning spoke decided to go to GSJBW, the date of actual transfer and what income was lost during that period. But the evidence does not permit such a detailed analysis.

9 Mr Meredith, an accountant, is a partner in Ferrier Hodgson. He has calculated Arrive’s lost income from records provided to him by Arrive. The records did not permit Mr Meredith to determine how much lost income could be attributed to particular clients. He requested documents that would have established those figures but the documents were not provided. I am left to speculate whether or not the documents exist.

10 Without having access to those documents, the only method open to Mr Meredith to assess the loss was to compare Arrive’s income before and after Ms Manning’s departure, adjust for any differences that could be attributed to other causes and conclude that any remaining difference was due to her breach of duty. Accordingly, he first assessed Arrive’s income for the year ending February 2004. The amount is $1,924,859. Next he estimated Arrive’s income for the following year. This calculation was complicated by the fact that Mr Meredith did not have access to a full year’s figures. He only had figures for the first nine months. By annualising those figures, Mr Meredith estimated the revenue for the year to February 2005 to be between $244,743 and $331,511. The difference in these amounts is explained by the fact that Mr Meredith made three separate calculations by annualising the first three months, six months and nine months of the year. Subtracting those figures from the income for the year to February 2004, he estimated the annualised lost revenue to be approximately $1,600,000.

11 This figure, however, had to be adjusted for losses caused by factors other than Ms Manning’s breach, the most important of which was the loss of insurance broking commissions from AXA on behalf of VicSuper. VicSuper (via AXA) had been a client of Arrive’s until it terminated their relationship on 19 March 2004. The termination was unrelated to Ms Manning’s breach of duty.

12 On the basis of apparently incomplete records provided to him by Arrive, Mr Meredith calculated the annual income for the year ending 29 February 2004 from VicSuper to be $423,331 and therefore he adjusted the annual income to $1,501,530.

13 However, there is a dispute between the parties as to how much the VicSuper commissions were worth. Mr McCarthy, a former Arrive employee who had been responsible for the VicSuper account until January 2004, gave evidence that VicSuper commissions for the 2003 calendar year amounted to approximately $700,000. The problem with this evidence is that the VicSuper commissions were recorded in Arrive’s accounts as "trailing commissions" and the total trailing commissions for 2003 was recorded as $790,842 of which $116,975 were non-VicSuper commissions. These figures would indicate that the VicSuper commissions could have been no more than $673,863 and are likely to have been much less because the non-VicSuper commissions that were recorded were only for four months. Mr McCarthy conceded the difficulty his evidence produced and suggested that Arrive’s records must be incorrect.

14 I am left to guess at where the truth might lie. The choices are: (a) that the VicSuper commissions were recorded accurately by Arrive (which seems unlikely because, against the evidence, there are several months in which no commission is recorded); or (b) that the VicSuper commissions were higher than shown and accordingly the overall revenue is higher than shown (this will not assist the defendant because the adjusted revenue figure after subtracting the higher VicSuper figure from the higher revenue figure will be the same as before); or (c) that the VicSuper figures were higher than recorded because some revenue recorded as non-VicSuper was, in fact, from VicSuper (this will have the effect of reducing the adjusted revenue for the year to February 2004 and consequently reducing the loss suffered in the relevant period).

15 It is difficult to know which way to turn. Mr McCarthy obviously has direct knowledge of the rates of commission received from an important client, but his view that the commission was in the order of $700,000 is likely to be too high. On the other hand, I am satisfied that the commission was probably more than that reported by Mr Meredith.

16 If Mr Meredith’s figures are accepted the annual revenue for the year to February 2004 after subtracting the VicSuper commissions was approximately $1,500,000. If Mr McCarthy’s figures are accepted, the figure is nearer $1,200,000. There seems to be no dispute that the annual revenue for the following year was approximately $300,000 and so the difference between 2004 and 2003 is somewhere between $1,200,000 (on Mr Meredith’s figures) and $900,000 (on Mr McCarthy’s figures). Assuming that revenue is earned evenly throughout the year, the difference (ie loss) for the period between 20 January 2004 and 16 February 2004 (27 days) is between $87,096.77 (($1,200,000 / 12) x 27/31) and $65,322.58 (($900,000 / 12) x 27/31).

17 To this point I have not considered adjustments arising from factors other than the loss of the VicSuper business. There are several other reasons, besides Ms Manning’s breach of duty, for Arrive’s decreased revenue. These include: the fact that Ms Manning was placed on "gardening leave" as soon as she gave her notice and was not permitted to do any further work; the fact that several other Arrive employees left at around the same time as Ms Manning and many of their clients followed them; and, the fact that many clients not contacted by Ms Manning prior to 16 February 2004 left Arrive when they discovered she had moved on. I do not mean to downplay the effect that Ms Manning’s breach had on Arrive’s business: the evidence indicates that perhaps sixty to seventy clients took their business to GSJBW as a result of Ms Manning’s approach and many of them were important clients. Nevertheless, the loss estimates outlined above will have to be adjusted down to account for these other factors which are not causally related to Ms Manning’s breach.

18 To further complicate matters, it would appear that it cannot be assumed that revenue is earned evenly throughout the year. Doing so may present a false picture. Below are Arrive’s revenue figures for the period January to April 2003 and for the corresponding months in 2004:

From 1 January 2003 to December 2003

	Jan-03 $	Feb-03 $	Mar-03 $	Apr-03 $
Initial Commission	0	0	0	0
Non-AMP Initial Commission	0	0	0	0
Non-AMP Trail Commission	70,958	41,918	34,793	17,228
Fee for Service	136,100	18,617	17,715	186,972
Monthly Revenue	207,058	60,535	61,797	204,200

	Jan-04 $	Feb-04 $	Mar-04 $	Apr-04 $
AMP-Initial Commission	0	0	0	0
AMP-Trail Commission	0	0	0	0
Non-AMP Initial Commission	1,885	-73	1,471	1,974
Non-AMP Trail Commission	103,043	3,455	10,048	8,215
Fee for Service	55,115	140,176	43,452	12,472
Monthly Revenue	160,043	143,559	54,972	22,661
Difference 2004 to 2003	47,015	-83,024	6,825	181,539

19 It can be seen from these tables that the revenues vary enormously from month to month and from year to year. It can also be seen that the revenue from the month immediately following Ms Manning’s departure, February 2004 – the first full month of the relevant compensation period – is more than double the figure for the corresponding month in the previous year. This is partly explained by the fact that in the 2003 figures, the fee for service figures were based on accounts sent out approximately two months after the services had been provided. In February 2004 these fees are much higher than usual because accounts were rendered to clients immediately upon them giving notice that they intended to move to GSJBW. Ordinarily those accounts would have been sent in March or April.

20 Even accounting for the anomalous figures in February 2004, it seems to me that if the loss is calculated by reference to the actual income derived in the relevant periods, it is less than if it is calculated by averaging.

21 In the light of this and the foregoing discussion, it will be apparent that the calculation of loss of income for the relevant periods is far from scientific. It is simply impossible to work out a precise figure. Even a rough and ready calculation is extremely difficult. With a good deal of judicial guesswork, I fix the amount at $45,000.

22 The third head of damage is the loss of the opportunity to keep the clients. If any client chose to stay with Arrive the contribution that client would make to Arrive’s revenue may have a capital value. Mr Kenyon, an expert in valuing businesses, in a report tendered by Arrive said that revenue of this kind has a capital value provided there is "a high degree of confidence [that the revenue] will continue to be received by the business in the foreseeable future." What Mr Kenyon had in mind is that a purchaser will pay the full capital value of an income stream if the purchaser is reasonably certain that the stream will continue to flow into the foreseeable future; he will pay little or nothing if the stream will not, or is unlikely to, continue; or he may pay something in between, dependent upon the degree of likelihood of the income continuing. I observe that if Arrive is to recover any compensation for the loss of the chance to retain clients it cannot recover both income lost from those clients as well as compensation for the loss of the chance to retain these same clients. Thus, it may be necessary to make an adjustment to the claim.

23 The task is to determine whether Arrive had any chance of retaining the clients who moved to GSJBW and place a dollar value on that chance. Arrive says that with an appropriate strategy it was likely to have retained more than 50 per cent of the clients that left. Mr Regan, a former general manager within the AMP group, outlined the strategy that could have been adopted. First the business would write to the clients advising them of the resignation of Ms Manning assuring them that they were valued clients of the business and forewarning them how their affairs would continue to be managed by the business, allocating a replacement planner and offering to arrange a meeting. Ms Manning would be required to attend meetings with the adviser and the clients to discuss proposed on-going arrangements. The meetings would involve Ms Manning personally informing the clients of her resignation, explaining the circumstances of any contractual restraints or other reasons why she could not continue to provide financial planning services, recommending the replacement planner and assuring the client that high quality services would continue to be provided by the business. In addition to those measures, Mr Regan said that PWC might have been called on to assist because some of the client relationships dated back to the time that the business was owned by PWC.

24 Mr Regan said that this strategy could not be implemented because he soon became aware that Ms Manning had approached clients and encouraged them to move to GSJBW. In fact, as events turned out letters were only sent to 48 of some 400 clients advising them of the "resignation of some staff members", the appointment of two new financial advisers, the intention of Arrive to continue to provide "premium quality wealth management advice" and that Arrive "look[ed] forward to continuing to be of service in assisting with your financial affairs".

25 In my opinion, Mr Regan’s suggested strategy was never to be implemented. Immediately upon Ms Manning giving notice Mr Reid and Mr Furness came down from Sydney and took charge of the Melbourne operation. They remained in charge until Mr Regan took over on 29 January 2004. Neither Mr Reid nor Mr Furness called in PWC to assist in dealing with clients. Mr Helmich, a director of AMP Services, did put in a call to a senior partner at PWC and sought an assurance that PWC would continue to refer clients to Arrive. That assurance was given. Mr Helmich did not ask for any other assistance.

26 So far as clients were concerned Mr Furness requested advisers to call clients to advise that Ms Manning had left and to reassure them that she would be replaced and that it was "business as usual" at Arrive. He told advisers that if clients wanted to know where Ms Manning had gone they were to be "evasive". But no one was appointed to replace Ms Manning or to undertake Ms Manning’s duties with regard to particular clients.

27 When Mr Regan took control he did nothing for a week while he spoke with Ms Manning to see whether she might change her mind. By the time Mr Regan reached the conclusion that Ms Manning would not return to Arrive, perhaps early in the second week of February, letters had begun to arrive from clients advising of their intention to move. To that point approximately two and a half weeks had elapsed during which no serious attempt was made to keep the clients from leaving. Even when letters began arriving nothing was done. It may be accepted that Arrive had little chance of enticing clients who said they would follow Ms Manning to change their mind. But what of clients from whom a letter had not been received? Moreover, in early February Arrive had no way of knowing how many clients had decided to go. Nor did anyone really appreciate that Ms Manning was the cause of many clients deciding to leave. Yet nothing was done to retain them.

28 It seems to me that nothing was done to retain clients for one of two reasons. First, the view may have been taken that it was a waste of time. Not only does that seem to have been Arrive’s attitude, it was hardly an unreasonable attitude, in my opinion. In my earlier reasons I said, albeit on a tentative basis, that given the close relationship between Ms Manning and her clients it was likely that most would follow her to GSJBW. Nothing that has been said during the second trial has altered my preliminary view. The second potential reason is that it was felt Arrive need to do nothing because of the belief (mistaken as it turns out) that Ms Manning was subject to a restraint of trade clause that operated for twelve months. It is not necessary to choose between the possibilities for the consequences are the same.

29 The value of the lost clients must be considered from the perspective of a potential purchaser who, in Mr Kenyon’s words, is willing to pay for an income stream that he is confident will continue to be received in the foreseeable future. From the moment Ms Manning tendered her resignation no reasonable purchaser would so regard the income received from Ms Manning’s clients. Nor would a reasonable purchaser be encouraged into thinking the income was maintainable by the type of strategy Mr Regan had in mind. A purchaser might be willing to pay a token amount for the client list, but he would do so more as a wager than as payment of a reasonable amount for an asset. I would not award any damages under this head.

30 There will be an order that Ms Manning pay Arrive compensation fixed in the sum of $45,000. I will hear the parties on costs.

I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Counsel for the Plaintiffs:	P Braham

Solicitor for the Plaintiffs:	Corrs Chambers Westgarth

Counsel for the Defendants:	P Jopling QC

Solicitor for the Defendants:	A J Macken & Co

Date of Hearing:	19, 23 and 24 October 2006

Date of Judgment:	9 February 2007

Federal Court of Australia

AMP Services Ltd v Manning (No 2) [2007] FCA 82 (9 February 2007)